STRATEGIC ALLIANCES ISSUES F Stability and risk F Failure rate of 30 to 60 percent F Even profitable alliances can be torn by conflict

SUCCESSFUL ALLIANCES MUST: NOT ONLY MAKE STRATEGIC SENSE BUT ALSO REQUIRE GOOD IMPLEMENTATION (SEE EXHIBIT 10.1 FOR STEPS IN IMPLEMENTATION OF STRATEGIC ALLIANCES)

WHERE TO LINK IN THE VALUE CHAIN? F Depends on the objectives that the firm seeks to achieve F Exhibit 10.2 gives some examples of common links in the value chain

EX 10.3 VALUE CHAIN LINKS IN U.S. ALLIANCES

SELECTING A PARTNER: THE MOST IMPORTANT CHOICE? F Seek – Strategic complementarity – Skill complementarity – Compatible management styles

ISSUES TO CONSIDER IN CHOOSING A PARTNER F The level of mutual dependency F The "anchor" partner F The "elephant and the ant" complex F Operating policy differences F Difficulties of cross-cultural communication

TYPES OF STRATEGIC ALLIANCES F Informal international cooperative alliances F Formal international cooperative alliances F International joint ventures

INFORMAL COOPERATIVE ALLIANCES (ICAs) F Nonlegally binding agreements between companies from two or more countries F Limited involvement between companies

FORMAL COPPERATIVE ALLIANCES F Higher degree of involvement than informal ICAs F Formal contract F Popular in high tech industries because of high costs and risks

INTERNATIONAL JOINT VENTURES F Separate legal entity owned by two or more parent companies from different countries F No need for equal ownership F Equity based on cash or other contributions

EX 10.5 TYPES OF ALLIANCES: SUMMARY

NEGOTIATING THE AGREEMENT F Joint venture contracts: legal documents that bind partners together F The formal agreement is not as important as the ability of managers to get along

EXHIBIT 10.6 ISSURES IN ALLIANCE AGREEMENTS F For both ICAs and IJVs – Under which country’s law does the agreement operate? – How will profits be divided? – Do you need a prenuptial agreement?

F Primarily for IJVs – What are the equity contributions of each partner?

ORGANIZATION DESIGN IN STRATEGIC ALLIANCES

DECISION MAKING CONTROL F Majority ownership does not necessarily = control F Operational decisions F Strategic decisions

MANAGEMENT STRUCTURES

DOMINANT PARENT F One parent controls strategic and operational decision making F Dominant parent often has majority ownership F Dominant parent treats the IJV as wholly owned subsidiary

SHARED MANAGEMENT F Both parents contribute approximately the same number of managers to the board of directors, the top management team, and functional area management

SPLIT CONTROL F Partners usually share strategic decision making F Partners split functional decision making

INDEPENDENT MANAGEMENT F IJV managers act like managers from a separate company F IJVs often recruit managers from outside the parent companies

ROTATING MANAGEMENT F Key positions rotate among partners F Popular in developing countries F Trains management talent and transfers expertise

CHOOSING AN ALLIANCE MANAGEMENT STRUCTURE F If one parent has dominant equity position – Dominant management structure more likely

F Equal ownership – Shared, split, or rotating management structure preferred F Similar technologies or know- how – Shared management structure preferred

F If different technologies or know-how – Split management structure preferred F If the venture has more strategic importance to one partner – Dominant management structure preferred

HUMAN RESOURCE MANAGEMENT IN STRATEGIC ALLIANCES F The HRM functions of an IJV are more complex because managers (and sometimes workers) come from two or more firms or from two or more cultures

HRM ISSUES F HRM planning F Parent involvement F Staffing the alliance management and technical personnel F Staffing the alliance workforce F Assigning managers strategic or operations tasks

HRM ISSUES (CONTINUED) F Performance assessment F Loyalty F Career development F Cultural differences F Training

COMMITMENT AND TRUST: THE SOFT SIDE OF ALLIANCE MANAGEMENT F Without trust and commitment the JV will fail entirely or never reach its potential

TRUST F The confidence that the partner will deliver on their expected contributions to the joint venture F “Trust cycles”

WHY IS TRUST IMPORTANT? F Required for IJV participants to contribute tacit knowledge and quality inputs F Weakness of formal contracts can never identify all the issues

KEY FACTORS FOR COMMITMENT F Pick your partner carefully F Know your strategic goals and your partner's F Seek win-win situations F Go slowly F Invest in cross-cultural training F Invest in direct communication

ASSESSING ALLIANCE PERFORMANCE F Match strategic objectives with performance measures

EXHIBIT 10.8 SELECTED PERFORMANCE CRITERIA FOR STRATEGIC ALLIANCES F Management Processes F Organizational Learning F Competitive F Marketing F Financial

IF THE ALLIANCE DOES NOT WORK F Negotiate an end or improve implementation F Know when to quit/invest more F Avoid “escalation of commitment” F Plan end - “prenuptial agreements” F Death not always failure

CONCLUSIONS F The importance of international strategic alliances F Most important decision: picking the right partner F No set structure in ownership, decision making control, or management control